Just what did Marius Kloppers, BHP Billiton's
chief executive officer, tell customers during his tour of Asia
in November? On his return to Australia, he said that he had
discussed their "concerns" about uniting BHP Billiton and Rio
Tinto and would continue to do so.
If he succeeds in persuading any of them that
his audacious proposal is good news, he will deserve a new job
explaining the benefits of Christmas to turkeys.
Steelmakers the world over are profoundly
nervous about BHP's proposal, which would leave the iron ore
market dominated by just two companies one Anglo-Australian,
and the other, Vale, Brazilian.
The European Confederation of Iron and Steel
Industries (Eurofer), the increasingly vociferous lobby group,
says it will fight the proposed merger even though Australian
iron ore accounts for a tiny percentage of supplies to the
But it is Asian customers who have the most
to fear, as they are the most reliant on Australian iron ore.
Australia's share of the Japanese, South Korean and Taiwanese
iron ore import market is about 60 percent; in China, it is
about 40 percent. Japanese and Korean steelmakers have publicly
aired their concerns, but it is the Chinese, whose booming
steel industry has inflamed iron ore prices over the last five
years, who are most worried, though less demonstratively. In
the weeks following the announcement of BHP's takeover bid,
there were only muted statements of concern out of Beijing.
The Chinese already face a tough time
negotiating with their suppliers on 2008 benchmark prices.
Chinese demand is still booming and the spot market is facing
an unprecedented boom. Talk of a 50-percent increase has become
so commonplace that anything less will be seen as a decent
settlement, so the Chinese are perhaps wary of throwing a
tantrum, preferring to remain on relatively polite terms with
their negotiating partners.
Presumably Kloppers explained to Chinese
steelmakers that his bold move for Rio is less about boosting
pricing power and more about the efficient use of
infrastructure in the Pilbara region of Western Australia,
where the two companies' iron ore resources are centered. If we
merge, he may have said, we will be in a better position to get
Australian ore from the ground and onto ships bound for China.
We will be able to supply you with bigger quantities of better
But the idea that BHP will be content to lift
volumes and avoid trying to flex its increased bargaining
muscle seems an unlikely proposition.
In Western Australia, observers are concerned
not only about putting a fat slice of the state's iron ore in
the hands of one company, but also about upsetting a major
trading partner. "The market is not going to be like this
forever," a source in Western Australia said, implying that it
would be bad practice to squeeze everything out of "our Chinese
partners" just because the going is good now.
Whether China will be able to do anything to
halt the BHP-Rio deal, even if its decides to, is uncertain.
Rumors that one or more Chinese companies might step in to make
a counterbid for Rio refused to die throughout November,
despite denials from China Investment Corp. (CIC), the body
charged with spending China's massive foreign exchange
But even if CIC or a Chinese steelmaker such
as Shanghai Baosteel Group does bid for Rio, would it
For one, the political implications of such
an intervention would be huge and double-edged. How would
Australia react to Chinese attempts to move in on a flagship
national company? And how would China's divided steel industry
share the spoils?
Beijing doesn't appear to have any legal
avenues to explore. Whereas Eurofer can make its opposition
felt through the sophisticated legal artillery offered by the
European Union, China has no such recourse.
In the long run, and for all sorts of reasons
aside from the immediate prospect of supplier consolidation,
China's steel industry itself needs to consolidate to face such
challenges. The proposed BHP-Rio merger is yet another reminder
that being a super-producer of steel doesn't necessarily give
you strength, but the hints are falling on deaf ears in
Beijing. The share of production held by China's top
steelmakers is expected to decline again this year as smaller
mills soak up every spare ton of iron ore. If China's steel
industry was more disciplined, it would be able to plan better,
buy less and bargain tougher.
Consolidation will be a long-term process,
and the current boom in iron ore prices may well be over before
all the merger and acquisition activity ends. For now, the
Chinese may simply have to grit their teeth, wait for the
outcome of BHP's audacious bid and concentrate on saving face
at the negotiating table.